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The Mega Trend of SaaS

12 Sep, 2008 By: Editorial Staff imageSource

The Mega Trend of SaaS

A trend we have seen in the last few years is software transforming from a
product to a service.  This is called software as a service (SaaS), or the
on-demand model. This model delivers software over the Internet for a fixed fee
per user, per month, or per use. Unlike the traditional software license model
used by companies (such as Microsoft & Oracle), there are no (or very low)
upfront fees.

Saas makes a compelling case for customers, especially for small and
midsized businesses (SMBs) which lack the infrastructure and large user
populations of  larger companies.

Saas positives are:

  • It saves a lot of money. A group study found the total cost of operating
    an on-demand software package is less than half that for an equivalent system
    bought the traditional way.
  • It’s quick. SaaS software can often be deployed in days and weeks, often
    eliminating the 6 to 18 mos with traditional license-and-install software. 
  • It allows IT departments to offload the delivery & maintenance of software
    applications. The SaaS firm invests in the technology, hardware, and ongoing
    support services, freeing the customer from those expenses.
  • It lowers risk. SMBs live in fear of the failure rates of large-scale ERP
    and CRM implementations.
  • It is sound economics. In the traditional model, the supply & demand for
    features usually don't match. Organizations buy software loaded with bells &
    whistles they don't need. IDC surveyed 250 IT execs in 2005 and found that
    companies thought they used just 16% of the software they purchased.
  • SaaS produces healthier relationships. The provider earns its return over
    the term of the relationship, rather than front-loading costs via a license

Improving Revenues

You need to know that SaaS changes the way a software company designs its
products, how it delivers them, and most of all, the economics underlying the
entire process. A typical SaaS income statement is instructive. At the top,
revenue is initially smaller, but much more stable and predictable, because
customers make regular subscription payments instead of large up-front license
fees and professional service fees. These payments are annuity-like because they
are locked into 2-to-4- year contract agreements.

Since SaaS requires less investment in professional services, the cost of
revenues should improve, thanks to its rapid deployment and web-based delivery.
A fully developed SaaS company should produce gross margins comparable to the
traditional software licensing model, but without the margin drag of
professional services. Operating expenses also drop, since a SaaS company can
support many customers on a single shared application and infrastructure.

Hardware and IT Services are Affected

The SaaS market is expected to grow to more than $10 billion over the next
two years – a fraction of the global business software market of $200 billion –
but it accelerates some industry trends.

concern is that it may contribute to harder times for hardware sellers that
don't shift themselves to an on-demand model. Companies do not need a lot of
gear with SaaS: a web browser and broadband connection are the entire IT
infrastructure needed. On the other hand, SaaS companies need others to manage
their infrastructure – data center, servers, storage, and middleware – and
service delivery platforms. Here lie new opportunities to consider.

The traditional model of selling enterprise software – IT services firms
serve as a sales channel, in return for a consulting engagement to implement the
actual  software – could suffer. Companies are responding by stressing their
industry expertise [a good track record] and their ability to continually
deliver solutions to ensure their clients experience optimum results.

SaaS excerpt courtesy of John Finneran, consultant / analyst specializing
in the financial value of technology:

or 201-327-8023.

“Taking an analogy from the global warming debate, the market for
Software-as-a-Service (SaaS) EDM is like a group of hungry penguins at the edge
of an ice flow. Many customers have been adopting a ‘wait-and-see’ approach to
the SaaS delivery model. Those who have taken the plunge are thriving on the
convenience, scalability, low capital expenditure and instant ROI that a nervous
economy demands and that a subscription-based service delivers. As certified
providers address the security fears that have held back many of the shuffling
observers, SaaS EDM customers can now add regulatory compliance and peace of
mind to this list of advantages. Now that the waters have been declared safe, we
are set to see a rush of takers for the safe and sleek approach to SaaS EDM
complete solutions.”

-Seamus Brennan, CEO CUSP Point Software

SaaS Summary

As companies continue to adopt outsourced models for automating critical
business processes, SaaS is becoming  attractive to many different types of
service providers as well as independent software vendors (ISVs). Under the SaaS
model, software features can be easily enabled or disabled by the customer or
user based on a specific industry, work environment, or other criteria. Through
this single-source approach, service providers reduce internal operating costs
and help lower total cost of ownership for customers. Implementation time is
normally shortened and greater user acceptance is achieved more readily.

Software as a Service (SaaS)

  • Multi-tenant Application
  • Subscription based payment model
  • Often 2-4 major upgrades per year
  • Software rights & management
    decided by vendor

Different than
Traditional ASP

New model for providing line of business (LOB) apps; Application
partitioning by architecture, not infrastructure; Better business and technology


Also different from Typical Outsourcing

  • Client doesn’t
    own software license

  • Client has less
    (or need for) customization options

-Courtesy of MWA Intelligence

A Dealer's Perspective

  • Business unit empowered buying cycle, eliminating dependence on IT
  • Faster ROI
  • Fills technology gap
  • Improved usability, no fuss solution
  • Software publisher is responsible for operating and maintaining

"SaaS EDM customers can now add regulatory compliance and peace of mind...
to this list of advantages"

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